Energy Review 12-2017
10th January 2018
Just when people were saying that there has not been all that much to write home about in the oil and gas industry, an incident occurs which highlights two things: one, OPEC ministers can sit around the table making agreements and the price of oil hardly budges; two, a hairline crack in a North Sea pipeline pushes the price of oil over US$65 for the first time since mid-2015.
Safety and the protection of the environment are rightly at the top of the list of responsibilities of oil and gas companies – big or small. As reported below, on the 6th December a very small amount of oil seepage was reported and a controlled shutdown of a pipeline was deemed the safest way to proceed. This will allow for suitable repairs to be carried out. That decision had more effect on the price of oil than when OPEC ministers recently met in a comfortable European city.
In spite of what we have said above, there have been and there will always be exciting developments in the energy world, as a glimpse at some of the latest headlines shows: floating production back in vogue, Premier Oil to keep Voyageur Spirit FPSO till 2019, first oil flows at Ophir field in Malaysia, Arctic refuge drilling moves closer to reality with Senate vote, Rosneft drills world’s longest well in Sakhalin, Maria field close to start-up offshore mid-Norway, first oil flows from Dana’s Western Isles development, giant Libra oilfield in Brazil starts production; the list goes on. And while the Gulf of Mexico is regarded by many as the Valhalla of oil production outside the Middle East, when they get going in 2019 and 2022 respectively, Johan Sverdrup and Johan Castberg will give Norway’s oil industry much more personality.
Brexit continues to figure in the daily headlines of nearly every serious newspaper in the United Kingdom but it is nearly always secondary news – if that – in most Continental papers. Six months ago elections in Austria, France, Germany and the Netherlands looked like having more of an impact on the European Union but recently one English journalist wondered how the EU could ever manage without the UK amongst its membership. The best thing the negotiators seem to be close to agreement on is the rights of EU and UK nationals living away from home. Taking the North Sea alone, how many “foreigners” are providing well-educated, well-needed and well-appreciated skills, expertise and energy in the oil and gas industry; this should not be allowed to change.
It has been reported that the UK financial services industry pays record taxes, ‘underlining the need’ for a Brexit deal. Amongst those not waiting are the following: The P&I Club, who has chosen Netherlands for its EU subsidiary; North P&I Club creating a Brexit unit in Ireland; Sompo International creating a Luxembourg operation; Britannia plumping for Luxembourg for its post-Brexit subsidiary.
Along with news of developments with market suppliers, we also report on the many moves with personnel. XL Catlin, Chubb and LSM all get a mention as they seek to improve their offering.
The Festive Season is upon us and networking is at its most feverish as the end of the year approaches. We wish our readers all the best in the coming weeks and hope that many friendships are renewed. We will also look forward to helping our clients and other readers with assistance with their insurance and risk management needs.
Britain’s biggest oil pipeline shut ‘for weeks’ for repairs
Britain’s largest oil pipeline could be shut down for weeks for unscheduled repair work, sending the price of crude to new two-year highs and triggering a steep rally in natural gas prices, just as a cold snap sweeps the country.
The Forties Pipeline System, which carries around 450,000 barrels per day of Forties crude from the North Sea to the Kinneil processing terminal in Scotland, had been operating at reduced capacity since the 7th December when a routine inspection revealed a small leak.
INEOS, a privately-owned Anglo-Swiss chemicals company, owns the pipeline and said it had taken the decision to close the system completely.
Oil traders estimated this was the first total closure since 2011, when thenoperator BP shut it down while a suspected World War II bomb was removed from the seabed.
“It’s early days and it is premature to give a time frame for the repair work. We can’t give a precise estimate other than to say it is a matter of weeks, rather than days,” an INEOS spokesperson said.
INEOS bought the Forties Pipeline System (FPS) from BP less than two months ago for US$250 million.
The pipeline, which handles nearly a quarter of total North Sea crude output, is also a major route for bringing natural gas to Britain that has been produced offshore.
Britain is in the grip of a cold front that has brought heavy snowfall and prompted the closure of schools and disrupted travel across the country.
INEOS, which also owns the 200,000-barrel-per-day Grangemouth refinery in Scotland, said the plant would have to seek “alternative supplies of crude”, but that there was enough oil currently in storage at Grangemouth for the company to “manage the situation.”
Fiona Legate, a senior analyst for the North Sea oil industry at consultant Wood Mackenzie, said even a temporary shutdown of the pipeline would have wide-reaching implications for the UK oil and gas industry.
“FPS transports liquids from over 80 fields, including the two largest producers in the UK – Buzzard and Forties,” she said.
“The bulk of throughput from FPS comes from ten fields … In 2017, FPS transported more than 40 percent of liquids in the UK Continental Shelf.”
The price of Brent crude oil rose by nearly two percent on the 11th December to its highest since mid-2015 – around US$65 a barrel – while prices of Forties on the physical market traded at four-month highs.
Forties is the biggest of the five North Sea crude oil streams which underpin the dated Brent price benchmark.
Worker dies after falling off offshore rig in Norway
Norway’s Aker BP has confirmed that one person has passed away following a serious accident on the Maersk Interceptor drilling rig on the Tambar field, off Norway, on the 7th December.
According to the company, the deceased, a Norwegian citizen and employee of Maersk Drilling, fell into the sea during maintenance work on the rig. The person was picked up from the water by a standby vessel and transported by helicopter to Haukeland University Hospital in Bergen.
Another person, also an employee of Maersk Drilling, was injured during the incident. His condition is not critical. The person has been transported to Stavanger University Hospital, Aker BP added.
“Our thoughts are now with the families, the injured person and everyone else who is affected by this serious accident. We have cooperated closely with Maersk Drilling and will do everything we can to take care of those affected and their families in this difficult situation,” says Chief Executive Officer of Aker BP, Karl Johnny Hersvik.
How the incident occurred has not yet been clarified.
“This is a serious accident, and we will do our utmost to identify the cause. We will make all resources available in the upcoming investigation,” Mr Hersvik said.
“We will now continue to focus fully on safeguarding the personnel on board Maersk Interceptor, the personnel on the Ula field and other employees in Aker BP and Maersk Drilling who are affected by this serious incident,” Mr Hersvik continued.
“The drilling operation on Maersk Interceptor has been secured. Production on Tambar has been shut down. The emergency response organisation in Aker BP was immediately mobilised and has cooperated closely with Maersk Drilling, the Joint Rescue Coordination Centre (JRCC) and relevant authorities to handle the situation,” the oil company said.
Oil tanker gets stuck in Arctic ice, drifts ashore
On the 8th December, Rosatom, the Russian state-owned company which operates the country’s fleet of nuclear-powered icebreakers, revealed that on the 30th October tanker Chukotka entered the waters of the Northern Sea Route and then sailed alone, aiming to travel across the Arctic route without icebreaker assistance.
However, Barents Observer had reported that it failed. In the Sannikov Strait, the area between the New Siberian Islands and the mainland, the ship became icebound and subsequently drifted with the ice on to a sand bank. The precise date that this happened is unclear.
On the 22nd November the nuclear icebreaker Yamal, which is mainly used for tourism and scientific expeditions, arrived on site. The tanker was pulled off the ground and taken to a place of safety. Rosatom representative Vladimir Artyunin said that Chukotka subsequently continued eastwards, but with support from icebreakers. Yamal is now back in ice waters near Sabetta.
Chukotka Trading Company, which owns the ship, has not released any information about the incident, the report claimed. No leakages have been reported.
Marine Traffic information indicated that Chukotka was located near Kotelny in the New Siberian Islands by the 28th October, which does not sit easily with Rosatom’s chronology of events. Chukotka had sailed from Murmansk.
Pipeline explodes in south-eastern New Mexico oil patch
A pipeline exploded in south-eastern New Mexico’s oil patch, closing two highways but causing no reported injuries.
Eddy County Emergency Manager Jennifer Armendariz said the pipeline that exploded early on the morning of Wednesday 6th December is in a sparsely populated area about ten miles (16 kilometres) south of Carlsbad, believed to be used for natural gas.
Armendariz said four energy companies have operations in the area and that authorities were working to identify the pipeline involved so it can be shut down.
The explosion occurred near the junction of US 285 and State Route 31 and closed both highways.
County officials initially advised nearby residents to evacuate but later advised those in a two-mile (three-kilometre) radius of the junction to shelter in place while authorities worked to stabilise the situation.
Explosion at Petroperu crude oil tank kills two workers
An explosion at a Petroperu crude oil tank killed two men who had been performing maintenance work on the 6th December, the state-owned oil company said.
Petroperu was investigating the cause of the blast at the 300-cubic-metre tank (10,594 cubic feet) near its oil pipeline in the region of Cajamarca, the company said in a statement.
Beatriz Alva, a Petroperu spokeswoman, said the explosion had not disrupted normal operations.
The men killed were contract workers, Petroperu said. A third man suffered first- and second-degree burns.
The explosion followed repeated oil spills from Petroperu’s pipeline which the company has blamed on attacks by unidentified vandals.
Worker dies aboard Petrobras 10000 drillship in Gulf of Mexico
A worker died in an incident aboard the Petrobras 10000 drillship in the US Gulf of Mexico early in December.
Brazilian oil company Petrobras said the crewmember passed away early on the 2nd December, “as a result of an incident.”
The Spencer Ogden employee received immediate medical attention on the rig, but unfortunately he passed away. The proper authorities were notified. The cause of the incident is being investigated.
The drillship in question is owned by Transocean. According to previous reports, the drillship was supposed to remain in the US Gulf of Mexico until January 2018. It is then expected leave to Brazil where it would until August 2019.
A Transocean spokesperson confirmed, “Transocean has notified the proper authorities. The crew member was employed by Spencer Ogden Inc. The operator and contractors involved have stopped operations and will supply additional details, as appropriate. Our thoughts and prayers, and the thoughts and prayers of everyone working on the rig, remain with the crew member’s family.”
TransCanada’s Keystone pipeline leaks 5,000 bbl in South Dakota
TransCanada Corporation shut down its Keystone pipeline at about 6:00 a.m. CST on the 16th November after a pressure drop was detected in its operating system resulting from an oil leak which is now under investigation.
The estimated volume of the leak is 5,000 bbl. The section of pipe along a right-of-way roughly 35 miles south of the Ludden pump station in Marshall County (about three miles south of Amherst, SD) was isolated within 15 minutes, TransCanada reported.
TransCanada is providing updates to state and federal regulators, including the US Pipelines & Hazardous Materials Safety Administration and the National Response Center.
The company expects Keystone to remain shut from Hardisty, Alberta, to Cushing, Oklahoma, and Wood River-Patoka, Ill., while response is under way.
Keystone Marketlink, between Cushing and the Gulf Coast, continued to operate normally.
On the 20th November Nebraska’s Public Service Commission was scheduled to release its decision on passage of the system’s Keystone XL expansion through the state.
Keystone Pipeline Leak Likely Caused by 2008 Construction Damage
A federal agency has said that a leak was caused by damage during construction in 2008.
The Pipeline and Hazardous Materials Safety Administration issued a corrective action report on the 28th November on the estimated 210,000-gallon oil spill. The report said a weight installed on the pipeline nearly a decade ago may have damaged the pipeline and coating.
According to the report, weights were placed on the pipeline in areas “where water could potentially result in buoyancy concerns.”
TransCanada spokesman Mark Cooper said the company has been working cooperatively with the federal agency and has begun “a safe, controlled and gradual start-up” of the pipeline. Cooper says that process would take a couple of days.
South Dakota officials do not believe the leak polluted any surface water bodies or drinking water systems. The company disclosed the buried pipeline leak on agricultural land in Marshall County on the 16th November.
Hess halts production at three fields in gulf after Shell Enchilada fire
Hess Corporation has shut in production at three of its Gulf of Mexico platforms after a fire at Shell Oil Co.’s Enchilada platform on the 8th November. The fire was associated with a 30-inch export pipeline.
Shell is developing a plan for repairing the damaged portions of Enchilada and associated assets. All production coming into the Garden Banks Gas Pipeline system also remained shut in until further notice.
Shell shut in production at Enchilada, Auger, and Salsa platforms.
Hess shut in production at its Baldpate, Conger, and Penn State fields. Production also is shut in at the Shell-operated Llano field, of which Hess has 50% interest. Hess production at these fields is about 30,000 boe/d.
Hess is working closely with Shell regarding Enchilada’s restart.
Bahrain blames Iran for oil pipeline blast
Bahraini officials have blamed Iran for an oil pipeline explosion on the 10th November south of Manama in an escalation of Persian Gulf tensions, dismissed by Iranian counterparts as “absurd and false.”
The blast at the village of Buri, ten miles south of Manama, damaged several buildings. The fire was quickly extinguished after Bahrain Petroleum Company (Bapco) cut the flow through the damaged AB3 pipeline.
The pipeline is one of three which carry crude to the 260,000-b/d Bapco refinery at Sitra from offshore Abu Safa, shared by Bahrain and Saudi Arabia and operated by Saudi Aramco.
A press statement said Interior Minister Rashid bin Abdullah Al Khalifa called the incident “the latest example of a terrorist act performed by terrorists in direct contact with and under instruction from Iran.”
A spokesman for the Iranian Foreign Ministry, Bahram Qassemi, said Bahraini officials “should know that the era of making such absurd and false statements and the time of playing such childish blame games has come to an end.”
Piracy and armed robbery against ships in Asia down in 2017
There were a total of nine incidents of piracy and armed robbery against ships in November 2017 in Asia, down from 12 in the same month last year, states ReCAAP ISC in its November report.
Seven were actual incidents and two were attempted incidents. Four were piracy incidents and five were armed robberies against ships.
There was no actual or attempted incident involving crew abduction in the Sulu-Celebes Sea and waters off Eastern Sabah in November 2017. However, on the 22nd November there was a theft of oil cargo. There was also an increase in the number of incidents occurring on board ships while anchored in the South China Sea.
All four incidents in the South China Sea (SCS) occurred in close proximity to each other, and were thought to have occurred when the ships were anchored outside the port limit areas in the SCS to avoid paying port dues. ReCAAP ISC said that it was concerned at the increase in the number of incidents in the SCS and advised all ships to avoid anchor outside the port limit area.
Between January and November there were 71 reported incidents, of which 60 were actual and 11 were attempted. This represented the lowest number in the past ten years; it was down 9% on January-to-November 2016; 63% down on January-to-November 2015.
However, there was an increase in the number of incidents reported at ports and anchorages in Bangladesh (Chittagong), Philippines (Manila and Batangas), on ships while underway in the South China Sea and in the Straits of Malacca & Singapore.
Of the seven actual incidents in November 2017, one was a CAT 1 incident, three were CAT 3 incidents and three were CAT 4 incidents.
The CAT 1 incident involved the hijacking on the 22nd November of the barge Ever Omega, which was being towed by tug boat Ever Prosper off Singkawang, Indonesia. The barge was eventually recovered, but her cargo of Crude Palm Kernel Oil (CPKO) had been stolen.
Brit moves Gibraltar reinsurer to Bermuda
Specialty re/insurer Brit is relocating its Gibraltar-based reinsurer to Bermuda as part of its long-term strategy.
The process was expected to be completed by the end of 2017, the company said. As part of the move Brit Insurance (Gibraltar) will become Brit Reinsurance (Bermuda).
“This is a natural move for us as we continue to expand our Bermuda platform, while it is also highly complementary to our continued focus on the US market,” said Brit CEO Matthew Wilson.
Mark Allan, Brit Chief Financial Officer, added, “Bermuda is an important hub for Brit, and its combination of a mature regulatory environment, including Solvency II equivalence, and access to highly qualified and experienced people makes it the right home for Brit Re to support the Group’s longer term strategy.”
Sedgwick acquires Cunningham Lindsey
Technology-driven risk solutions provider Sedgwick Claims has acquired management and loss adjusting firm Cunningham Lindsey.
The strategic acquisition of Cunningham Lindsey is set to broaden Sedgwick’s international footprint, according to a statement.
“Bringing the incomparable talent, expertise and robust global capabilities of Sedgwick, Vericlaim and Cunningham Lindsey under one umbrella is among the greatest stories to emerge from the claims industry in many years,” Sedgwick group President Michael Arbour commented. “This exciting development puts us in an optimal position to meet the increasingly complex needs of clients around the world.”
The Cunningham Lindsey group includes a range of services addressing all aspects of the risk management life cycle, including pre- and post-loss; their specialties in loss adjusting, third-party claims administration, global account management, forensic engineering, and restoration and repair consulting, among others.
Jane Tutoki, global CEO of Cunningham Lindsey, said, “Joining forces with Sedgwick and Vericlaim presents an opportunity to provide our clients an end-to-end service solution around the world. Our vision is to align our complementary services and further grow the reach to a scale that will help redefine the expertise and talent we can offer. We are excited about the next step in this journey with Sedgwick and Vericlaim to offer a truly global path to transform the way we provide our services together.”
Post-Brexit preparations: New Luxembourg subsidiaries for Liberty, Britannia and Sompo International
Liberty Specialty Markets (LSM) intends to re-domicile its insurance company from the UK to Luxembourg.
At the same time, the company stressed that it will be maintaining its substantial London presence. The decision was taken in preference to setting up a separate insurance company.
LSM announced in July that it would be establishing its post-Brexit European headquarters in Luxembourg. LSM has since established and licensed an inhouse coverholder in Luxembourg, Liberty Specialty Markets Europe (LSME). The unit began underwriting on behalf of LSM’s UK insurance company Liberty Mutual Insurance Europe Limited (LMIE) from branches throughout
Europe on the 1st November.
It is intended that LSME will also underwrite on behalf of Lloyd’s Brussels when it commences business.
Britannia P&I Club is also to establish a subsidiary in Luxembourg to ensure it can continue to trade in Europe after the UK leaves the EU on the 29th March 2019.
The company has said that Europe accounted for more than 40% of its global business.
It said that “with the advice of third-party consultants and having engaged with various EU regulators, Britannia’s board has now instructed the managers, Tindall Riley (Britannia) Ltd, to focus on Luxembourg as the preferred option”.
Britannia said that it expected to make a formal application to establish the new Luxembourg-domiciled subsidiary in early 2018 enabling it to be operational by the end of 2018.
Finally Sompo International has announced plans to establish a new European insurance headquarters based in Luxembourg.
SI Insurance (Europe) has been established to ensure the company maintains EU passporting rights following the UK’s exit from the European Union.
The Bermuda-based firm, the subsidiary of Sompo Holdings formerly known as Endurance, said it had put the strategy in place due to the significant uncertainty over the terms of the agreement for the UK’s exit. Sompo International said the new Luxembourg operation will create a base for continued business expansion in Europe.
The company intends to maintain its presence in the Lloyd’s market, and current offices in London and continental Europe. Regulatory approval is expected in the second quarter of 2018.
Time for change? Dennis Culligan offers ideas
Is the energy market delivering the products its clients want or require? Dennis Culligan of risk, insurance and claims management company Longdown|EIC believes the energy sector and wider insurance market need to re-examine how they meet those needs and whether change is due.
There has been much discussion in recent months over the future direction of the market and there are those who believe the upstream product has not adapted to the change in market conditions – with some saying the issue is not simply confined to the marine and energy sector but across the broader insurance market. The message is that it is time for some new ideas.
The Offshore Energy Package policy has been the standard means of insurance cover available to upstream energy companies since the late 1970’s. Little has changed fundamentally.
The basic product – a single ground-up quota share policy in several sections – has remained substantially the same. Indeed, the typical Offshore Package comprises cover for Property Damage, Operator’s Extra Expense (Well Control & Pollution), Legal Liability, Business Interruption and Cargo.
The industry has not remained completely still. Some improvements have been developed – such as Pay On Behalf Of (POBO) for OEE claims – but an Upstream Insurance Manager in 2017 is buying essentially the same product as his/her 1979 predecessor.
It comes at a time when the industry may be forgiven for pointing out it has bigger issues to contend with.
The downturn in the oil price has coincided with a softening pricing market for both primary and reinsurance markets. Indeed, the industry is having to work out if the low oil price will be the new norm. The pricing environment has failed to change significantly for some time which again has the sector looking at a new norm where the rates of the past will not be seen again – barring a significant shift in the market.
As such both underwriters and brokers are seeing their margins squeezed.
Tight margins or not, the client remains the most important part of the equation; that and at a time when the energy sector is still looking to recover from the impact of the oil price fall as they face new challenges.
Therefore, the market may well need to ask itself: is the Upstream Energy Packet still fit for purpose? Or, alternatively, if it isn’t broke, then it doesn’t need fixing?
My view remains that there needs to be change. The sector requires new innovative solutions. Those solutions will need to meet the challenge of delivering cover which is at a lower cost but remains relevant and effective.
Therefore, there is a current need for creative thinking in order to shape the market of the future. We are seeing the rising attraction to some form of self-insurance and the threat that poses to the size of the risk pool.
We may well need to look at ways to structure products and potentially look at the ways in which the cover is layered.
The market does, however, have a range of risks which can be seen as potential opportunities. New markets continue to open up as technology allows access to new reserves of oil and gas.
We also see the potential for new products with cyber the obvious one. But we are seeing demand for cover for supply chain disruption where no physical damage has arisen, and for the risks around field decommissioning.
Driving innovation and change is never easy and it will require expertise on both sides of the equation. Then again, the energy sector very rarely takes the path of least resistance.
The risks faced by the sector’s clients are changing and new products need to be created to meet those risks. They should be seen as an opportunity rather than a threat if approached as products which are offered in addition to the traditional core covers, rather than instead of what has served the market so well but are now struggling to keep up with market dynamics.
Pool Re to include physical damage from cyber terrorism, effective April 2018
Pool Re, the UK’s terrorism reinsurance pool, announced it will extend its cover to include material damage and direct business interruption caused by acts of terrorism using a cyber trigger. The new cover will be available in April 2018.
The cover, which will exclude intangible assets, will be offered as standard to all policyholders that purchase terrorism insurance from Pool Re members.
This initiative is the culmination of more than two years of work, said Pool Re in a statement.
Pool Re explained the coverage extension is based upon a research study commissioned from the Centre for Risk Studies at the University of Cambridge Judge Business School.
“We will continue to evolve our coverage and today’s announcement is an effort to future proof the scheme and to close a potential gap in coverage before it became apparent,” said Julian Enoizi, Chief Executive, Pool Re.
“The threat from a cyber-attack is evident and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” he added.
“This was a clear gap in our coverage which left businesses potentially exposed. After rigorous analysis, we determined that we can close this gap,” Mr Enoizi said, noting that this move “establishes a new standard for terrorism cover and places the UK at the forefront of nations reinforcing their economies against emerging risks.”
He said it also demonstrates “what can be achieved through cross-industry, academic and governmental collaboration.”
Simon Ruffle, Director of Research and Innovation at the Cambridge Centre for Risk Studies, said the study for Pool Re was very timely given the evolving nature of cyber terrorism.
“The centre has applied an academic approach to modern business, enabling a deep analysis of current geopolitics and technology in order to illuminate the shape of an emerging threat to the UK economy,” he said. “The cyber terrorism scenarios we examined provide insight into what types of attacks might be possible in the next few years that could impact Pool Re’s portfolio.”
The Future of insurance – blockchain captives
As technology becomes more and more important for the insurance industry, Matthew Queen, General Counsel and Chief Compliance Officer at Venture Captive Management takes a look at the road ahead for blockchain captives.
“Blockchain is a quantum leap for risk management. The mysterious newcomer to fintech revolutionises current insurance practices and opens the door to new types of insurance.
From commercial general liability policies to our social contract with the government, blockchain creates new possibilities. This article explores how blockchains work, applications of blockchain to insurance, and how the captive insurance industry stands to change the world.
What is Blockchain?
Blockchain is a distributed, peer-to-peer system resting on top of the Internet. There is no point of control. The system is a trust-based network of computers in competition with each other to mine for tokens.
Bitcoin is, by far, the most popular token in a blockchain, but there are others: Dogecoin, Potcoin, and Ether are very popular. These tokens are traded like any other currency but have no coins, bills, or physical artefacts. In any other era this would create an unworkable, chaotic system, but new technology creates new possibilities.
Since the technology is new, and very complex, few practitioners really understand how blockchains work. Think of blockchains as a stack of Legos. Each Lego has its own serial number, called a hash. These hashes are a long string of nonsense characters that look something like this (v987vnwef908wednd0-sdc09j). Each block links back to the previous block in the chain all the way to the first block, called the genesis block.
Now, further imagine that this stack is replicated in hundreds of other places. Every time a new block is added to one of the stacks, all of the stacks assess whether that new block is a genuine new block, or a fraud. If the majority of the stacks agree that the new block is valid, then all of the stacks add this new block. This synchronous engine is called a peer-to-peer (P2P) network.
In the real world, each of these Lego stacks are located in a computer. These computers which are creating new blocks are called nodes. This is the feature which makes the blockchain resilient – infinite redundancies. In a way, this reflects how the Internet started as it was created on a series of equal nodes on an IP network.
These nodes mine for new blocks by solving maths problems all day long. The algorithms solved by the nodes are very hard to solve, but are easily checked on the backend. The computer which solves the algorithm first has its answer checked by the other nodes. Once the nodes agree whether the answer is correct, then the miner is awarded a token.
Mining is a continuous process of solving problems and checking the other nodes’ solutions. The answer to the algorithm is not pre-determined. Rather, the programmes vote on the winner and the token is awarded to the miner who reaches consensus. This is why P2P blockchain networks are built on trust. The trust is not in the moral sense, but in the trust of mathematics.
Since the majority of the nodes have to agree on the answer solved by the winning node, it is extremely difficult to hack a blockchain. However, nothing is impossible. There have been some hackers who have launched “consensus attacks” on blockchains by achieving a significant stake of the mining power of the blockchain. While this is bad, this technique cannot alter the
blockchain’s history. In other words, if you’ve got 30 Bitcoin in the blockchain, a consensus attack cannot take those away from you.
The effect of a consensus attack is that the attackers can double spend new coins. This bad situation is relatively rare and there are armies of white hat professionals keeping the pirates at bay.
Effects of Blockchain
Value can be stored in a blockchain with complete anonymity. The absolute privacy of blockchain is a headache for anti-money laundering professionals in the FBI and other agencies as it is nearly impossible to prove the source of blockchain coins without an informant. The good news is that all of this financial data is secure. Consequently, we no longer need to rely on accountants, bankers, or dusty old documents.
More interestingly, blockchains remove the need for securities. While the definition of a security is very broad, most people think of stocks. Stocks are little more than a reflection of the amount of a corporation that you own.
There is no reason that a stock certificate is necessary. New companies are conducting Initial Coin Offerings (ICO) to fund new ventures. These ICOs skirt around some of the Blue Sky rules from the SEC and are another headache for regulators as the government tries to keep up with the rapidly changing technological environment.
In April 2017, Estonia announced that it was considering an ICO for Estcoins. The concept was floated to raise money for the nation. While the ICO is a long way off, there is no doubt that governments will start issuing ICOs. In the long run, things are looking bad for paper money. The dream of every treasury is to issue non-counterfeitable currency desired by the whole world. Estonia is opening the door to this new reality.
With a single invention, blockchain eliminates society’s need for banks, securities, and even currency. Insurance is not immune from the sweeping changes.
Given that blockchains are trust-based networks, there is no need for humans to move money from one account to another. Blockchains open up the possibility of programmable money. This means that there are events which will trigger the payment of funds into an account. So long as there is consensus in the network of the occurrence of the event, the funds flow without need for human interaction.
This streamlines insurance but raises questions: How do you programme insurance policies? For example, if half of a house burns down, how do you assess the claim without sending out an adjuster? You do not. Without sufficient sensors or other future technology, simple house fires, fender benders, and many other traditional insurance functions still require adjusters, claims handlers, and financial professionals dedicated to moving funds.
But what about binary situations? What if you know that the occurrence of an event triggers a pre-determined amount of money?
Now you’ve got a blockchain application. For example, if a Category Five hurricane passes over a neighbourhood, then it is very likely that the insured properties will suffer losses at the limits. Catastrophic events frequently pay the maximum a policy can pay. Thus, if sensors placed in strategic locations all indicate winds above a certain speed for an amount of time, then the blockchain may trigger the automatic payment of funds. This application can easily be moulded for fire, hail, earthquake, and other catastrophic events. These insurance policies are called Smart Contracts as the insurance policy is paid upon the occurrence of an event based on rules in the programme.
If you eliminate an insurance company’s claims department, then the insurance company is almost a decentralised autonomous organisation (DAO). A DAO is a robot company. Once set up, the company operates based off of a set of rules written by the creator. For insurance companies, this means that insureds will pay premiums into an organisation which, theoretically, could have no humans working in it at all.
Theoretically, DAOs incur very few expenses past the initial expenses of setting them up. If a DAO were to offer a pre-determined indemnification upon the occurrence of an event, the DAO could offer ultra-cheap insurance policies. For example, if sensors in your car record an accident occurring at less than ten mph, then it would automatically distribute US$XXX to your bank account, but an accident at 45 mph automatically releases US$X,XXX. These pre-determined claims payments keep the costs of insurance to a bare minimum, which opens the door to car insurance policies for a dollar or two per month.
While the insured likely waives the right to sue in the event of a disagreement (how do you sue an anonymous online insurance entity?), there is a huge market out there for ultra-cheap insurance.
Captive Insurance Applications
Autonomous captive insurance companies are an owners dream. A parent company decides it wants to self-insure an exposure, so it sets up a DAO which pays claims upon the occurrence of an event. The captive managers set up the company, walk away, and now the business owner pays premiums into a company which runs itself and never wants payment for its services. Dividends automatically remit from the DAO once the reserves are no longer encumbered. Further, if the captive qualifies for the 831(b) election, the dividends will be remitted tax free back to the captive stakeholders.
With current technology, captive insurance DAOs are too expensive for the vast majority of businesses. However, blockchain technologies applications are astounding. Since many reinsurance policies contain follow the fortune clauses, it is conceivable to set up a captive taking a layer of risk paying out upon the occurrence of an event.
Once the captive’s blockchain achieves consensus that the clause was activated, the payment would automatically occur. Or, captives could be used to pay the deductible automatically for any losses in catastrophic events in a deductible buyback policy.
Protected cell companies can use blockchain applications as well. The core can run its own blockchain and create individual cells operating as separate insurance companies. Each of these companies could insure separate risks and pay claims upon the occurrence of an event.
Assuming the cells share capital with the core, the core company can automatically add capital to individual cell’s reserves on an as-needed basis if reserves dip below certain thresholds. Further, assuming a favourable loss history, the cells can reduce premiums charged to the insureds so long as capital rates maintain certain ratios. While these applications of cell companies are nothing new, these functions generally require the interplay of accountants, actuaries, and underwriters. Through blockchain security and proper programming, these features can be automated into robot insurance companies.
The Future of Insurance
The road ahead is exciting. As blockchain technology reaches ubiquity, the ability for governments to regulate insurance will become increasingly difficult. Once a safe and secure insurance DAO is established, there is no reason that the company needs to be domiciled in one jurisdiction versus another.
A blockchain established in the Philippines is indistinguishable from one in Russia, the US, or New Zealand. Quality insurance will be available via the Internet without any ability for governments to tax or regulate. Whether distributed, autonomous insurance companies are good or bad is irrelevant – the fact that the technology exists is sufficient to ensure their eventual birth.
Consequently, new forms of insurance will arise. For example, people can universally pay into a supranational social security programme which pays out a stream of income upon the filing of a claim. The amount paid to the insureds would be a function of the amounts paid in premium over time, but there is no reason that citizens across the globe cannot pool resources for universal social security. Or unemployment. Or basic income.
This is the zenith of captive insurance. Insurance initially started with wealthy merchants pooling their resources to create large companies. Then individual companies create their own insurance policies due to inefficiencies in the market.
With blockchain, individuals can band together to create their own insurance policies free of any government regulation. This is the future and we are lucky to witness it all come together.”
UK financial services industry pays record taxes, ‘underlining need’ for Brexit deal
Britain’s financial services industry paid a record £72.1 billion (US$96.2 billion) in tax during the past fiscal year, PwC said in a report that piles pressure on the government to secure favourable trading terms for banks after Brexit.
Tax revenues in the finance sector rose one percent in the year to March 2017, hitting their highest level in the ten years data has been collected, the report said. It was commissioned by the City of London, home to the “Square Mile” financial district.
“With Brexit edging ever closer, it is more important than ever to underline just how important the financial services sector is to the rest of the economy,” City of London Policy Chief Catherine McGuinness said.
“While it’s too early to gauge how the country’s tax-take might suffer if firms chose to move business away from the UK, these findings highlight how vital it is to meet the urgent needs of the sector as part of negotiations.”
The City has called for a transition deal by the end of 2017 to limit the amount of financial jobs moving to the EU’s other 27 member countries before Britain’s departure from the bloc in March 2019.
The Bank of England expects 10,000 financial services jobs to move by “Brexit Day” as London-based banks, insurers and asset managers open or expand existing hubs in the bloc to maintain customer links there.
The report said 43.5%, or £31.4 billion of tax receipts from firms tracked was in employment taxes paid by employees and their companies.
“If a large number of jobs were to leave the UK as a result of Brexit, then the tax revenues of the financial services sector would almost certainly be impacted,” the City of London said.
The sector accounted for 11% of UK tax receipts, and for the first time, the annual report showed where the majority of financial jobs are located.
A third of financial services jobs are in London, with Scotland accounting for 13.6%, and the south-east of England 12.4%.
Allianz expands AGCS in China and Indonesia
Allianz Global Corporate & Specialty (AGCS) is targeting further growth in Asia by expanding its presence in China and Indonesia, seeking to capitalise on opportunities from the growing insurance markets.
The company has commenced operations in Beijing, China, and Jakarta, Indonesia, following the opening of its new branch office in South Korea in June.
The new Beijing division, located in China Overseas Plaza, is AGCS’s third in the country, after Guangdong and Shanghai. The expansion of the China operations is aimed at capitalising on products for engineering and liability as well as emerging opportunities in environmental impairment liability (EIL), entertainment insurance and global programmes.
AGCS has also appointed Megasari Manurung, Underwriter for Financial Lines, and Indrajaya Wardhana, Underwriter for Engineering, based within Allianz Utama in Jakarta. AGCS operates as a division of Allianz Utama in Jakarta and will initially focus on financial lines and engineering products alongside the country’s robust economic growth and increased investment into infrastructure.
UK P&I Club chooses Netherlands for EU subsidiary
The UK P&I Club has said that it will establish a subsidiary in the European Union authorised to insure ships registered in the European Economic Area (EEA).
The Club said that the UK’s decision to leave the EU had led to uncertainty as to whether UK insurers could trade within the single market after Brexit. It noted that UK P&I Club, in common with many international insurers, was established in the UK (as well as Bermuda), which made it necessary to make arrangements to continue trading after the UK’s exit from the EU, should the
final arrangements for Brexit, or any transitional arrangements which are put in place, fail to offer adequate access to the single market.
UK P&I Club Members with ships registered in the EEA are currently insured by UK (Europe) through its London office, but unless the UK remains part of the EEA this arrangement will not be possible post-Brexit. The Club said that about 20% of the UK P&I Club’s Members, measured by gross premium income, would be affected by Brexit.
Therefore, in order to ensure that these Members will not be not unduly inconvenienced by Brexit, the UK P&I Club will establish a subsidiary in the EU authorised to insure ships registered in the EEA.
The Club board has selected the Netherlands as the preferred location for the new subsidiary, and said that a further announcement would be made once it had been decided where in the Netherlands this subsidiary would be located.
The Club said that there would be no change for Members whose ships were not registered in the EEA. For Members whose ships were registered in the EEA there would be two (minor) changes:
- the new subsidiary would be the insurer named on the certificates of entry
- Members would be asked to pay the premium into a bank account belonging to the new subsidiary.
No other changes were expected. The usual contacts at the Club for Members would remain unchanged. Members whose underwriting and claims contacts were based in London or Greece would still be dealing with those contacts after Brexit.
The Club said that it expected Standard and Poor’s to extend the Club’s credit rating to the new subsidiary. The Club also said that the new subsidiary would be in a position to front for other Thomas Miller-managed clubs who could be affected by Brexit, meaning that costs could be shared.
UK P&I Club said it was anticipated that the new subsidiary would be fully operational sometime during the third quarter of 2018, well before Brexit on the 29th March 2019 and in time for the 2019 renewal season.
North P&I Club creates Brexit unit in Ireland
The board of directors of North and Sunderland Marine has agreed that a subsidiary insurance company should be established in Ireland to underwrite all future European Economic Area (EEA) business with effect from the 20th February 2019.
The move follows the result of the UK referendum on membership of the EU in July 2016.
North and Sunderland Marine currently rely on EU passporting rights to insure risks located in the EEA. Details of the future UK/EU trading relationship and its implementation are currently unknown and subject to ongoing negotiations between the EU and the UK government. However, expectation is that North and Sunderland Marine’s existing passporting rights will ultimately be lost either immediately upon termination of the UK’s EU membership or at the end of any agreed transition period, according to a statement.
North P&I Club is a global marine insurer providing protection and indemnity (P&I), freight, demurrage and defence (FD&D), war risks and ancillary insurance to 140 million gross tonnage (GT) of owned tonnage. Through its guaranteed subsidiary Sunderland Marine North is also an insurer of fishing vessels, small craft and aquaculture risks.
The decision to locate the subsidiary in Ireland was partially driven by the fact that regulatory, legal and taxation framework in Ireland is similar to the UK, where North is an experienced operator. Ireland also offered a “mature regulatory system with substantial experience in the supervision of Solvency II insurance companies, a strong talent pool within the financial services
sector, easy travel connections from Newcastle as well as the ability to conduct business in English,” according to the statement.
The structure and local operations of the Irish subsidiary are subject to ongoing investigation and a future announcement will be made in respect of these issues during implementation phase of contingency plans, which is expected to commence during the first quarter of 2018, the statement noted.
Britannia P&I to open Greece office next year
Britannia P&I Club will open an office in Greece this year, it announced at its annual European Members Forum, held in Athens on the 9th November.
The Forum was attended by 52 Members from across Europe. “Opening a Britannia office in Greece will mean that we can enhance the personalised service to those and future Greek Members,” said Andrew Cutler, CEO of Tindall Riley (Britannia) Ltd.
Dale Hammond (Director, FD&D and Claims Director for the Club’s Greek membership) and Simon Williams (Director, Underwriting and who has underwriting oversight for the Club’s Greek membership) will oversee arrangements for establishing the office.
Mr Cutler said that further initiatives would be announced in Asia during the coming months.
Britannia P&I Board recently announced there would be no P&I General Increase to its advance call for 2018/19. A US$10 million capital distribution was announced to P&I mutual members based on premium for ships on risk at midnight BST 17th October 2017.
KBRA registered as rating agency in Europe
Kroll Bond Rating Agency Europe (KBRA Europe) has been registered as a credit rating agency in Europe by the European Securities and Markets Authority.
Based in Dublin, KBRA Europe aims to provide the global capital markets with timely, accurate and transparent credit analysis.
As part of its move to Europe, KBRA has hired a number of rating analysts to provide services across the structured finance, financial institutions, project finance and corporate markets.
“We look forward to serving investors and providing all market participants globally with an unparalleled view on ratings accompanied by the most thorough, detailed, and timely analysis and research,” said Jim Nadler, President and CEO of KBRA.
New underwriting vehicle for marine at Lloyd’s
Neon, Beat Capital and the management team have launched Chord Re, an underwriting vehicle established by Stefan Long, formerly Head of Aspen Re London.
Chord Re said that it expected to both structure and lead programmes in specialist classes.
It will initially underwrite on behalf of Neon Syndicate 2468. It was launched on the 6th November and will start quoting for risks incepting from January 1st 2018. It has received the requisite approvals to act as a Lloyd’s Coverholder.
For year-one the focus will be specialty-focused reinsurance lines, including Marine and Marine Composite, Property, Engineering, Aviation & Space, Terror, Nuclear and Cyber.
Tom Meyer will be Chief Underwriting Officer, alongside Chris Schmidt, Ed Wheatley and Marc Brendle. The team will also include two Assistant Underwriters. They will work closely with Neon’s Chief Underwriting Officer and Active Underwriter Darren Lednor across its portfolio. John Cavanagh will join as Non-Executive Chairman after he retires from Willis Re at the end of 2017.
Chord Re is a joint venture between Neon, Beat Capital and Chord Re’s management team.
Their long-term ambition is to create a fully integrated reinsurance carrier, the launch partners said.
Chord Re CEO Stefan Long said that “we intend to build a market-leading reinsurance business, differentiated by product expertise, with a balanced portfolio that combines quantitative analysis with experienced judgement to provide clients with innovative tailored solutions.
“We believe that the knowledge, experience and relationships of the team at Chord Re, aligned to the support of Neon, creates a compelling proposition and we look forward to offering an attractive new source of capacity to the market.”
Cyber solutions are evolving
Cyber insurance is evolving quickly, offering opportunities for carriers able to properly price and manage this risk, writes James Auden, Managing Director, Insurance, and Eduardo Recinos, Senior Director, Insurance (LatAm) at Fitch Ratings.
Today the global insurance market for standalone cyber coverage is estimated at US$2.5 billion to US$3.5 billion. Growth is rapid: the April 2017 Council of Insurance Agents & Brokers’ (CIAB) Cyber Insurance Market Watch Survey reported 32% of surveyed companies purchased some form of cyber coverage, up from 24% a year earlier. Fitch foresees global standalone cyber premiums increasing from US$12 billion to US$20 billion within a decade.
Fitch research suggests that a substantial portion of cyber underwriting risk currently lies outside standalone cyber policies. Embedded ‘silent’ cyber exposures in traditional commercial policies are significant and create considerable uncertainty regarding losses generated from a large cyber event.
Over time, silent cyber risk will diminish as policyholders and insurers address cyber coverage in policy language. However, in the near term, silent cyber creates a genuine challenge for insurer management and industry observers such as Fitch in fully understanding and measuring cyber exposures.
Better aggregation and modelling tools are necessary to improve insurers’ ability to assess potential losses from larger cyber events. Various experts generated studies estimating potential economic and insured losses from cyber catastrophes, but assessing which events are of most concern, and within the realm of possibility, is difficult.
Cyber insurance is a profitable venture for early market entrants. While the market is poised for considerable premium growth in the next few years, signs of competitive forces eroding profit opportunities may occur in cyber earlier than in previous emerging product segments.
Over the near term, Fitch views cyber underwriting as a risk which may exert downward pressure on some non-life insurer ratings if larger loss scenarios emerge.
Ultimately, insurers who lack underwriting expertise, manage cyber risk accumulations poorly, or fail to recognise loss potential from silent cyber exposure within their traditional commercial insurance products are most vulnerable to ratings downgrades.
People in the News
Skuld makes senior hire to target growth in North America
Marine insurance provider Skuld has appointed Rachael Simpson as Senior Vice President, London P&I (protection and indemnity) operations.
Ms Simpson’s primary focus will be on business development in North America, according to the press release. She will report to Matthew Burton, Head of London P&I, and assumes her new role in March 2018.
Ms Simpson has over 20 years of P&I experience. She will join from Steamship Mutual where she is the underwriting manager for its American business.
XL Catlin names global programme and captive regional director for Asia
XL Catlin has appointed Shiwei Jin to the position of Global Programme and Captive Regional Director for Asia.
In this role, Jin will drive the global programme and captive business and aim to develop strong relationships with XL Catlin’s broker partners and clients across Asia. She will take on this role while continuing her position as a member of the global programme centre of excellence team.
Jin has over ten years of experience in the insurance industry, and joined XL Catlin in 2007 as a regional research manager for Asia.
Standard Syndicate appoints Derrick as cargo class underwriter
Standard Syndicate has named Nick Derrick, who is Chairman of the International Union of Marine Insurance cargo committee, as Cargo Class Underwriter.
Mr Derrick is a former chairman of the London Market Association’s joint cargo committee.
He joins Standard syndicate from Travelers Insurance, where he had been senior marine cargo underwriter on Syndicate 5000 for more than five years.
Chubb appoints head to manage multinational captive programmes
Property/casualty insurer Chubb has appointed Barry Beard as Head of Global Service and Complex Multinational UK & Ireland.
Based in London, Mr Beard will be managing Chubb’s multinational network and services for the UK and Ireland, and will be responsible for helping clients deal with complex multinational captive programmes. He will report to Suresh Krishnan, Head of Global Accounts Division, Chubb Europe.
Mr Beard is moving from his current role as head of credit management for Chubb’s European, Eurasia and Africa, and Asia Pacific divisions.
LSM appoints Beard as senior war & terrorism underwriter
Liberty Specialty Markets (LSM) has hired Jennie Beard as Senior Underwriter of war and terrorism.
Ms Beard will report to war and terrorism Underwriting Manager Paul Beattie and will be based in London. Ms Beard joins the carrier from Sompo Canopius, where she was co-head of its London-based terrorism team, writing a diverse global account including major corporate clients.